Law of Returns to Scale Assignment

Added on - 21 Apr 2020

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ContentsQuestion 1........................................................................................................................................3Question 2........................................................................................................................................4Question 3........................................................................................................................................5Question 4........................................................................................................................................7Bibliography....................................................................................................................................8Diagram 1 Law of Returns to Scale for Awesome Industries.........................................................4Diagram 2 Cross Elasticity between products (ham) of Swine Company and products of cattleranch................................................................................................................................................5Diagram 3 Profits accrued by Amazing Institute............................................................................6Diagram 4 Effect of taxes of Prices. Total Output may shift slightly towards left to Q2...............7
Question 1The law of Returns to scale helps understand the effects of increase in the production capacity ofthe firm on the total costs of every unit produced. According to the law, the firm may experiencethree stages:[ CITATION Cha09 \l 1033 ]Stage 1: Increasing Returns to ScaleThe firm may have increasing returns to scale i.e. the total output will increase in a greaterproportion to an increase in the production capacity.Stage 2: Constant Returns to ScaleThe firm may have constant returns i.e the total output may increase in the same percentage asthe increase in the production capacity.Stage 3: Diminishing Returns to ScaleThe firm may have diminishing returns i.e. the output may increase at a smaller percentage thanthe increase in the production capacity i.e. returns are diminishing
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